http://www.gamespot.com/news/2005/06/28/news_6128295.html
Report: PS3 to sell for $399, cost $494 to make

Merrill Lynch Japan predicts Sony will lose more than $1 billion on hardware 
during its next-gen console's first year on the market--a sum it may not be 
able to recoup.
According to the latest issue of Japanese magazine Toyo Keizai, Merrill 
Lynch Japan Securities has recently calculated an analysis that the 
production of a single PlayStation 3 console will cost Sony approximately 
54,000 yen to make ($494), as of its initial release in 2006.


Merrill Lynch Japan estimates that the machine's main components--namely its 
Cell chip, RSX, and BD-ROM drive--will cost about 11,000 yen ($101) each. 
After adding the other electronics that will be used in the PS3, the 
machine's production cost goes up to 54,000 yen.

Given that Sony's PS3 will face stiff competition from Microsoft's Xbox 360, 
the chances that Sony will release its console at its production cost is 
slim. Under the assumption that the Xbox 360 is expected to sell at around 
$299, Merrill Lynch Japan predicts that Sony will sell each PS3 at the price 
of 44,800 yen ($410) in Japan and $399 in America. That would mean Sony 
would suffer a loss of more than 130 billion yen ($1.18 billion) during the 
first year of the PS3's release.

By comparison, the PlayStation 2 cost 39,800 yen ($364) in Japan and $299 in 
America when it launched in 2000. During its first year of release, Sony 
Computer Entertainment suffered a loss of 51.1 billion yen ($458 million), 
but it recovered the next year with a profit of 82.9 billion yen ($759 
million), followed by 112.6 billion yen ($1.03 billion) the year after.

It is normal for game companies to take a loss on hardware whenever a new 
console launches, since they typically focus on acquiring market share 
rather than generating a profit during the first year. During the second 
year and afterward, they can recover the losses with the savings that come 
from mass production and with licensing fees from publishers.

However, Merrill Lynch Japan warns that the normal console business cycle 
may be disrupted if Microsoft cuts the Xbox 360's price when the PlayStation 
3 launches. The report goes on to say that such a move could hurt Sony's 
plans, bringing an additional loss of 80 billion yen ($730 million) in its 
second year and 50 billion yen ($457 million) in its third year. Thus far, 
Sony has already invested 200 billion yen ($1.83 billion) into development 
and production for the Cell chip alone.

Toyo Keizai goes on to interview Sony Computer Entertainment president Ken 
Kutaragi, who avoided revealing the PS3's price but hinted that it would not 
be marked down excessively. "Whether consumers think a product is expensive 
or cheap all depends on the balance between its appeal and price," he said. 
"Our ideal [for the PS3] is for consumers to think to themselves, 'OK, I'll 
work more hours and buy it.' We want people to feel that they want it, no 
matter what."

"When Nintendo was selling its 16-bit machine at around 12,500 yen ($114), 
we sold the first PlayStation at 39,800 yen ($364)," continued Kutaragi. 
"The press was saying that it was expensive, but it was a huge hit. It's the 
same thing with the PlayStation Portable from last year. The Game Boy 
Advance is a same handheld gaming machine, and it costs less than 10 
thousand yen ($91). On the other hand, our PSP had cost 25,000 yen ($229). 
But people lined up overnight to buy it, and it sold out on the day of its 
launch. It all depends on whether people want it. Of course, I'm confident 
that the PS3 is a product that people will definitely want."


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